In 1992, hotel operator Marriott became the first company in the industry to evolve into what later became known as 'asset-light'. By spinning-off its underperforming real estate operations into a separate investment trust, the hotel giant found a way to grow its presence and profit without the burden of risky equity investments.

Three decades later, Marriott International has become the world's largest operator, while almost every other international hotel company worth its salt has followed, and continues to follow, the asset-light strategy to some extent.

In 2016, InterContinental Hotels Group (IHG) completed its move towards a fully asset-light model following the sale of the InterContinental Hong Kong. This marked the end of a process that had witnessed the sale of almost 200 hotels in a decade, for gross proceeds of almost $8 billion. Last year, Hyatt (known for its 'asset recycling' strategy, which involves selling owned assets to reinvest in new ones) announced plans to sell $1.5 billion of real estate.

Fewer assets, less worry

The factors driving this trend are well known. In the 1980s, Marriott borrowed huge sums of money to build hotels it would later sell and manage. For a while, the strategy worked. But when a recession hit in the early 1990s, the company suddenly found itself lumbered with 141 hotels that nobody wanted to buy. Other companies faced similar crises.

The merits of being 'asset-light' were proved once again during the 2007–2008 financial crisis, when overleveraged hotel companies needed to shore-up their balance sheets during an uncertain economic climate. The less they had on their books, the less exposed they felt to market fluctuations. After all, exiting a management or franchise contract is a lot easier than selling a distressed asset.

At the same time, the dynamics of the hotel market were shifting. By the mid- 2000s, the European landscape had become increasingly brand dominated; scale was king and franchising was gaining maturity. The advent of the internet meant the larger the chain, the more visible it would be online.

Meanwhile, outside of Europe, hotel companies were moving into countries where they couldn't necessarily trust or understand the real estate sector and the laws governing it. Owning assets in markets like China, India and sub- Saharan Africa was not considered wise – and local partners were often mandatory.

Put together, the 'asset-light' strategy allowed operators to focus on what they do best: operating hotels.

"The view was taken that hotel operators and brands aren't best placed to manage and maximise the value of real estate," says Andreas Scriven, head of hospitality and leisure at Deloitte. "Instead, there was a focus on separating the owner of the bricks and the operators, who could then focus on running their hotels."

Right approach

The asset-light ownership model has presented challenges to the hotel industry, however, with analysts suggesting an increasing number of operators are now beginning to either enter leasing agreements, put forward 'key money' or even buy properties outright. This new strategy has been dubbed 'asset-right'.

According to Scriven, one of the determining factors in this shift is the brand landscape. When major operators, all of who have strong brand portfolios, are bidding for contracts it can be difficult for owners to distinguish between them. Many have therefore responded by offering that little bit extra.

"The terms of the contract between, say, Accor, Marriott and Hilton can often be identical," says Scriven. "If one of them is willing to put in $5,000 a room to freshen them up, as an owner, that's hugely appealing."

I am a big believer in cycles… I think cycles will continue, and I think we are seeing a lot of indicators that we are close to the top of the market again.

For example, in May, IHG announced an agreement with Foncière des Régions, to rebrand and operate 12 hotels and one pipeline hotel in its portfolio across the UK. The deal provided IHG with an opportunity to achieve immediate scale for its Kimpton brand, which IHG has been trying to get into Europe for a while. To push the deal forward, the company announced it would operate the hotels under managed leases.

"It's not their traditional model but this presented a strong opportunity to get into one of the strongest markets in Europe with some scale," says Scriven. "When you have those opportunities, it drives a rethink. Is pure asset-light absolutely correct, or can you actually create shareholder value by accelerating a brand roll-out or securing high-quality assets through putting a bit of skin in the game.

"The deal shows there is constant movement in terms of what the right ownership structure looks like, and it changes from company to company. Are we going to see the likes of IHG and Hilton owning huge amounts of real estate again? Probably not. But they might do it, or shift from management to leases in selected situations in absolute core locations."

While the focus on brands and scale brought huge success for a small number of top hotel chains, for midsized operators interested in landmark properties and developments, life has been more difficult.

When it comes to winning contracts, the extensive membership schemes and bottomless advertising budgets of the big operators can be hard to compete with. In these circumstances, operators say the 'asset-right' model makes more sense for them.

"When we made the diagnosis, it was clear that opportunities in key markets had been missed because of a lack of flexibility," Federico. J González, president and CEO of Radisson Hotel Group, told Hotel Management International upon announcing a new development strategy. "Looking around Europe, there are so many destinations where we could, and should, be bigger. When you don't have a track record in a market, the right management contracts and franchise agreements can be tougher to come by, and this, again, is where a change in mindset is necessary. It's not always about the number of hotels but understanding the value of individual properties. A successful lease is a lot more profitable than multiple management or franchise contracts."

Over the past two years, operators like González's Radisson Hotel Group, as well as Meliá Hotels International and Hyatt, have shown an increasing willingness to put money in and sign longer-term leases for the right property and right price.

"They have to differentiate themselves and compete a little bit differently," says Scriven. "Radisson Hotel Group, for example, are now the biggest player in Russia in terms of a global brand. That's because they went into the country early and took some leases. Some of those leases might look quite challenging in retrospect, but it gave them presence."

Market research

Of course, putting skin in the game needn't commit hotel operators to buying whole properties. For some, asset-right simply means signing a lease, committing to rental payments and taking on a degree of operational risk.

For others, it means signing a management contract with some kind of minimum guarantee for the owner or putting in 'key money' – an up-front payment than enables operators to secure the contract."There are a number of different structures that are being looked at," says Scriven. Controlled risk

Whatever the size of the operator, regaining some degree of control over the properties they operate is likely to help them re-establish brand identity.

Whereas in the past hotel chains owned and controlled almost every aspect of the experience they were selling, the switch to 'asset-light', and from management contracts to franchise agreements, has significantly diminished their role.

"You are relinquishing all the control you have over the customer experience because you don't control the asset anymore; and if you switch to franchise, you don't even control the operations," says Scriven. "The consumer still expects you as the brand to deliver that experience though."

But as operators show increased willingness to risk their own money, questions will be raised about their capacity to handle economic fluctuations, with many analysts arguing the market is now reaching its peak.

"I am a big believer in cycles," says Scriven. "Every time we get to this stage in the market, somebody, typically in the US, says we live in a post-cyclical environment, which is not true.

"I think cycles will continue, and I think we are seeing a lot of indicators that we are close to the top of the market again."

Last time the bottom fell out the market, in 2007, hotel operators certainly found themselves overleveraged with big leases and hard-to-sell real estate. This time around, have they learned any lessons?

"Some people have and others haven't," says Scriven. "Invariably, over the next couple of years, we are going to see some distress again."

The extent to which this distress resembles what was witnessed ten years ago may, in some part at least, depend upon what operators come to define as an asset-right development model.